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Class 3

The document discusses the uses and differences between job order and process cost systems. It explains the flow of costs in a process cost system using journal entries to assign manufacturing costs. It also covers computing equivalent units of production and the four steps to prepare a production cost report.

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17 views

Class 3

The document discusses the uses and differences between job order and process cost systems. It explains the flow of costs in a process cost system using journal entries to assign manufacturing costs. It also covers computing equivalent units of production and the four steps to prepare a production cost report.

Uploaded by

carla
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Class 3 - 03/11

Pre-class

1. Discuss the uses of a process cost system and how it compares to a job order system.

Uses of Process Cost Systems


Companies use process cost systems to apply costs to similar products that are mass-produced in
a continuous fashion.
In comparison, a job order cost system assigns costs to a specific job.
Service companies that perform individualized, nonroutine services will probably benefit from
using a job order cost system. Those that perform routine, repetitive services will probably prefer
a process cost system.

Similarities and Differences Between Job Order Cost and Process Cost Systems
In a job order cost system, companies assign costs to each job. In a process cost system,
companies track costs through a series of connected manufacturing processes or departments,
rather than by individual jobs. Thus, companies use process cost systems when they produce a
large volume of uniform or relatively homogeneous products.
Similarities

1. The manufacturing cost elements. Both costing systems track three manufacturing cost
elements—direct materials, direct labor, and manufacturing overhead.
2. The accumulation of the costs of materials, labor, and overhead. Both costing systems record
the acquisition of raw materials as a debit to Raw Materials Inventory, incurred factory labor as a
debit to Factory Labor, and manufacturing overhead costs as debits to Manufacturing Overhead.
3. The flow of costs. As noted above, both systems accumulate all manufacturing costs by debits
to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. Both systems then
assign these costs to the same accounts—Work in Process, Finished Goods Inventory, and Cost
of Goods Sold.

Differences

2. Explain the flow of costs in a process cost system and the journal entries to assign
manufacturing costs.
Process Cost Flow

Assigning Manufacturing Costs—Journal Entries


- Debit all raw materials acquired to Raw Materials Inventory at the time of purchase.
- Debit all factory labor to Factory Labor as labor costs are incurred.
- Debit overhead costs to Manufacturing Overhead as these costs are incurred.

3. Compute equivalent units.

A process cost system uses the same idea, called equivalent units of production. Equivalent
units of production measure the work done during the period, expressed in fully completed
units. Companies use this measure to determine the cost per unit of completed product.

Conversion costs are the sum of labor costs and overhead costs.

In computing equivalent units, the beginning work in process is not part of the equivalent
units-of-production formula.

4. Complete the four steps to prepare a production cost report.

A production cost report is the key document that management uses to understand the activities
in a department; it shows the production quantity and cost data related to that department.
In order to complete a production cost report, the company must perform four steps, which as a
whole make up the process cost system.
1. Compute the physical unit flow.
2. Compute the equivalent units of production.
3. Compute unit production costs.
4. Prepare a cost reconciliation schedule.

1. Compute the physical unit flow:

Physical units are the actual units to be accounted for during a period, irrespective of any work
performed. To keep track of these units, add the units started (or transferred) into production
during the period to the units in process at the beginning of the period. This amount is referred to
as the total units to be accounted for.
The total units then are accounted for by the output of the period. The output consists of units
transferred out during the period and any units in process at the end of the period. This amount is
referred to as the total units accounted for.

2. Compute the equivalent units of production.

3. Compute unit production costs.


Unit production costs are costs expressed in terms of equivalent units of production. When
equivalent units of production are different for materials and conversion costs, we compute three
unit costs: (1) materials, (2) conversion, and (3) total manufacturing.

4. Prepare a cost reconciliation schedule.


The cost reconciliation schedule shows that the total costs accounted for (Illustration 3.22)
equal the total costs to be accounted for (Illustration 3.21).

A production cost report helps managers evaluate overall profitability by comparing costs to
previous periods, competitors, and expected selling price.
Companies often use a combination of a process cost and a job order cost system. Called
operations costing, this hybrid system is similar to process costing in its assumption that
standardized methods are used to manufacture the product. At the same time, the product may
have some customized, individual features that require the use of a job order cost system.

A cost-benefit trade-off occurs as a company decides which costing system to use (A cost-benefit
trade-off helps managers determine which costing system to use.). A job order cost system, for
example, provides detailed information related to the cost of the product. Because each job has
its own distinguishing characteristics, the system can provide an accurate cost per job. This
information is useful in controlling costs and pricing products. However, the cost of
implementing a job order cost system is often expensive because of the accounting costs
involved.

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